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Ninety minutes before Federal Reserve Chairman Ben Bernanke appeared before the Senate Banking Committee Wednesday to deliver the Fed’s semiannual monetary-policy report, the Department of Labor reported that annualized consumer price inflation had accelerated from 3.4 percent during 2005 to 4.3 percent during the first quarter of 2006 to 5.1 percent during the April-June period. Perhaps more ominously, inflation measured by the core consumer price index (CPI), which excludes the volatile energy and food sectors, had increased from 2.2 percent during 2005 to an annualized rate of 3.2 percent during the first half of 2006. Moreover, the monthly change in the core CPI reached 0.3 percent for the fourth consecutive month, a worrisome trend that had not manifested itself in more than a decade.

In the wake of the spikes so far this year in both overall inflation and core inflation, Mr. Bernanke admitted early in his prepared testimony that “[i]nflation has been higher than we anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities.” After acknowledging that relentlessly rising energy prices had caused an unanticipated surge in inflation, Mr. Bernanke was asked what he considered to be the most significant threat to the ongoing economic expansion. He ominously replied that the primary risk currently confronting the Fed was that “inflation might move up and might force us to be more aggressive” in raising short-term interest rates, which the Fed has already increased by 4.25 percentage points over the past two years. Alluding to the current conflicts in the Middle East, he cited “geopolitical issues,” saying that “oil prices are a risk” as well.

The Fed’s forecast for economic growth during 2006 (between 3.25 and 3.5 percent) changed very little from its projection in February. However, given that the economy grew at an annual rate of 5.6 percent during the first quarter, the Fed’s latest forecast suggests that it believes the economy will expand at an annual rate of less than 3 percent during the last three quarters of this year. The Fed’s July report did ratchet up its 2006 forecast for inflation, compared not only to the February report but especially to last July’s. The Fed’s preferred gauge for inflationary pressures is the core Personal Consumption Expenditures (PCE) Price Index, which is similar to the core CPI. In recent years, the Fed in general and Mr. Bernanke in particular have cited a “comfort level” of annual changes of 1 to 2 percent in the core PCE price index. Last July, the Fed forecast that the core PCE would increase 1.75 to 2 percent. In February, it projected a change of “about 2” percent. The latest report projects a 2006 increase of 2.25 to 2.5 percent; and at least one Fed governor or district bank president forecast 3 percent.

Answering questions from senators on Wednesday and House members on Thursday, Mr. Bernanke commented on other economic policy issues. Given the deplorably low national savings rate, which the Fed’s report documented once again, Mr. Bernanke emphasized that “keeping our capital markets open to foreign investment is extremely important for the welfare of Americans. The kind of capital that comes in allows us to invest more than we otherwise could. It provides jobs; it provides new technologies that come with foreign investment.”

On the other hand, the savings-short United States cannot forever maintain desired business-investment levels by relying on financial-capital inflows from abroad, which are the arithmetic counterpart to our soaring trade and current-account deficits. “[W]e should become more reliant on our saving and reduce the current-account deficit,” he said. “From a current-account perspective,” he warned, “if we look forward five or 10 years at the rate we’re going, there will be increasing reluctance of foreigners to hold U.S. assets, and that will have effects on our economy, and we need to address that.”

On the long-term fiscal status of America, Rep. Dennis Moore, a Kansas Democrat, quoted a recent speech by David Walker, the comptroller-general of the United States and head of the Government Accountability Office. “The United States is now the world’s largest debtor nation,” Mr. Walker observed. “In the last five years alone, our nation’s total liabilities and unfunded commitments have gone from about $20 trillion to over $46 trillion,” Mr. Walker said. Asked by Mr. Moore if the comptroller general was correct, the chairman of the Federal Reserve replied: “Those are numbers which I think are consistent with the actuaries for Social Security and Medicare.”